As we watch the US Dollar fall every day to recent lows against every major currency we have to ask ourselves,at what point does it become a cause for
concern,not just for the US economy but also for the world economy, and just as importantly,what effect could it have on the Presidential Elections at
the end of this year.
The USA is a very proud country and it's people look to symbols to express the power and prestige of their nation.Next only to the Stars and Stripes
in symbolism in the American psyche is the US Dollar.
Worries that the United States will not attract investment flows to cover its widening current account deficit knocked 17 percent off the dollar's
value against the euro in 2003. The British Pound has gained more than 10 percent on the dollar last year.
Since the beginning of the year the slump of the Dollar has continued apace.
As I write this 1 Euro will buy you $1.2628 .1 British Pound=$1.8314.
All time lows against the Euro and Margaret Thatcher was Prime Minister last time the pound was so strong against the US dollar.
Will the fall in the value of the US dollar proceed gradually or will there be a financial crisis sparked by a rapid exit of funds from American
financial markets? This is an important question as US indebtedness reaches new highs.
The reason for the nervousness can be seen from the figures on the US current account deficit and its external debt. Last year the current account
deficit rose to more than 5 percent of gross domestic product (GDP), the level the Federal Reserve Board has identified as signifying potential
problems for US economy. Running at more than $500 billion a year, the US requires a capital inflow of more than $2 billion every business day to
finance its payments gap, with predictions that this figure will rise to $3 billion some time next year.
This is why the news that net inflows of foreign funds had plunged from $50 billion last August to just $4 billion in September 'the lowest level
since the crisis caused by the collapse of the hedge fund Long-Term Capital Management in October 1998' sent a tremor through financial markets.
Stock markets experienced a fall, and the price of gold, which tends to rise in times of financial uncertainty, hit a seven-year high of $400 per
Greenspan remarks that, 'some clouds of emerging protectionism have become increasingly visible on today's horizon.'
'The costs of any new such protectionist initiatives,' he continued, 'in the context of wide current imbalances, could significantly erode the
flexibility of the global economy. Consequently, it is imperative that creeping protectionism be thwarted and reversed.'
Greenspan is clearly concerned that under conditions where US financial stability has never been more dependent on what could well be called 'the
kindness of strangers', the Bush administration's imposition of protectionist measures, first on steel and now on Chinese textiles, could spark some
form of retaliation from both Europe and Asia, thereby destabilising financial markets and provoking a serious crisis.
So there you have it. Yes, Americans will be able to buy cheaper European products in the short term and holidays in Europe will be more affordable to
the average American(even if they would rather stay at home) but is there a crisis on the horizon?
.......and how will American voters react as they watch one of their country's strongest symbols immasculated before their eyes day by day seemingly
at the expense of the Euro?
[Edited on 21-1-2004 by Zion Mainframe]